UN’s Conference On Trade & Development Calls For Reduction In US Dollar Role

We are starting to see a bit of moving and shaking in the FX markets during the start of European trading, with the USD under pressure. The USDCHF was able to break the 1.0530 horizontal support , while the AUDUSD continued to push to new 2009 highs. But the big story was gold, which penetrated the $1000oz on its way to $1006.50oz (see our daily gold report). Strong trading by the precious metal put additional pressure on the USD. Perhaps the interesting news was the call by the UN Conference on Trade and Development (UNCTAD) to reduce global trades dependency on the USD.

The report also called for the creation of Bretton-Woods like system, which would monitor exchange rates of member countries. The knee jerk reaction was to sell the USD, since the report represented one more call for the removal of the greenback as the world’s reserve currency. In addition, economically critical countries such as China , Brazil and Russia have already made agreements to circumvent the USD. We expect the USD to eventually share its role as the world’s reserve currency but with currently no viable alternatives we see reports like this a just short term noise. Risk correlated trades are clearly en-vogue today, with stronger German factory orders and M&A activity picking up (takeover bid by Kraft for Cadbury).

In the UK, Chancelor Darling stated that a reduction is government spending could potentially damage Britain fragile recovery. He suggested that any move towards austerity should wait until “the recovery has been established”. We believe the BoE rate announcement will be an interesting event. Overnight, UK media speculated that a rate cut on bank reserves (in order to stimulate lending) might be in the cards. We believe this is unlikely and are still expecting an expansion in asset purchases. In Switzerland, seasonally adjusted unemployment rate spiked higher to 4.0% from 3.9% prior reading. Asian equity markets were higher across the board, with Shanghai composite posting a 1.71% gain. With a light economic calendar for the remainder of the day we expect choppy, non-directional trading.

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